Top Gun FP Client Note: The Recession Is Over

NOTE: Every week I write a Client Note for my clients. For a limited time, I am allowing non-clients to sign up and receive the Client Note. You can sign up at the top right hand corner of the website. I will also be posting the notes on my blog with a 24-48 hour delay from time to time. Here is this week’s.

The American economy appears to be in a cyclical recovery that is gaining strength. Firms have begun to hire and consumer spending seems to be accelerating.

That is what usually happens after particularly sharp recessions, so it is surprising that many commentators, whether economists or politicians, seem to doubt that such a thing could possibly be happening.

On Monday, responding to the Jobs Report, Harvard Economics Professor and NBER member declared “The recession over.” [UPDATE Mon 4/12: This generated a lot of buzz over the weekend and The New York Times this morning reported that the NBER is planning to announce today that it cannot yet declare an end to the recession: “Recession Arbiters, Wary of Certifying An Upturn”, The New York Times, April 12, B1).

On Wednesday, Bed, Bath & Beyond (BBBY), operator of 965 Bed, Bath & Beyond home furnishing stores in the US, announced a blowout quarter ended February 27, 2010. Same store sales were up 11.5% resulting in a 60% increase in net income.

On Thursday, retailers reported surging March same store sales including a 17% increase by Nordstrom’s, a 13% increase by Sak’s and a 10% increase by Target.

*****

By all indications, first quarter earnings which kick off next week will be superb. For one, the comparison to last year’s first quarter, the nadir of the recession, is highly favorable. Two, the economy is showing real signs of improvement. Combined, this should result in some pretty gaudy numbers.

The market action will be key. With the Dow and S&P sitting just below resistance at 11,000 and 1200, respectively, the question is whether all of this good news is already in stock prices. The response to earnings should give us the answer.

*****

Our market stance has been neutral since early February when I covered most of our shorts. In the last week, I have been considering shifting our positioning to modestly bullish – at least for the short term.

Top Gun has significantly underperformed the market for 12 months now (1Q 2010 Performance Chart attached). Looking at the attached chart casts that underperformance into stark relief. I am trying to open my mind to the possibility of a cyclical bull market of greater duration than I had previously thought possible – within the context of a secular bear market.

I imagine I feel like the great Warren Buffett during the garbage market of 1966-1968 – the last hoo-rah of the Go-Go bull market of the 1960s. Writing in the middle of that 26-month, 32% cyclical bull market Buffett wrote to his investors: “I am out of step with present conditions” (Letter to Partners, October 9, 1967).

In May 1969, Buffett made the decision to shut down the partnership and disburse funds to his investors: “I am not attuned to this market environment, and I don’t want to spoil a decent record by trying to play a game I don’t understand just so I can go out a hero” (Letter to Partners, May 29, 1969).

Over the next 12 months (May 1969-May 1970), the Dow dropped about 35%.

Hang in there friends I may be out of step with present conditions for the moment, but Top Gun’s best days are still ahead.

YTD Returns (through 4/9)

S&P: +7.11%

DJ Total: +8.27%

Top Gun: +1.84%

SPECIAL OFFER - FREE INVESTMENT REVIEW: For a limited time I am offering a free investment review. Pick any stock, bond, ETF or mutual fund. I will do a comprehensive fundamental/macro/technical analysis, write a concise analyst report, and consult with you for 30 minutes by phone or in person for free.